Sailing Manufacturing is a relatively new customer of Hammer Enterprises. In the short period that the two companies have done business with each other, Hammer has found Sailing to be, in management's words, "an expensive proposition." Numerous sales visits are typically required to "close a deal," with selling prices and discounts offered being among the most attractive in the industry. Complicating matters, Sailing is slow to settle its account, orders in small quantities, and often has numerous specialized shipping and handling needs.A recent customer profitability analysis has painted a very negative picture of Sailing Manufacturing, and Hammer's managers are questioning whether an on-going relationship with the firm is warranted.Required: A. Briefly explain why the customer
profitability analysis painted a negative picture of Sailing Manufacturing.B. What actions are available to Hammer Enterprises to improve Sailing's profitability?
What will be an ideal response?
A. Profit is a function of two basic factors-revenues and expenses-and Hammer is being squeezed on both elements. Prices are low, discounts are high, and order sizes are small. Furthermore, the costs of working with Sailing are high, courtesy of numerous sales calls being required to produce a sale, a slow-paying customer, and specialized handling and shipping needs.
B. Hammer should attempt to work with Sailing in a cost-cutting drive, explaining that favorable terms can only be extended for a short period of time. Acceleration of amounts due, increases in order size, and reductions in sales visits and specialized handling and shipping needs are possible topics for discussion/improvement. If Hammer is unsuccessful in its efforts, price hikes and/or elimination of discounts may be in order.
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